Greece default and Grexit looks like the best option

Outlook:

We are struggling with the idea that on Friday everything was hunky-dory—good payrolls, higher wages, Fed imposing the First Rate Hike in September—and on Monday the whole thing fell apart for reasons nobody can name. Even the Wavers are befuddled—we got only two waves down from the May 15 high.

Restoring the dollar’s moxie is going to take a lot of really good data. Today we get the JOLTs report (job openings and labor turnover), not normally a market-mover, meaning we have to wait for Thursday’s retail sales. But retail sales have been choppy—up a lot in March but flat in April. Maybe today’s Redbook chain store sales will give a clue. Market News notes that the fixed income crowd is girding its loins for a hefty May retails sales number to boost US 10-year yields to 2.50% and possibly more. We should point out that another crummy month for retail sales could have the opposite effect.

And the point of this data analysis is to guess how the Fed will view it next week. We are probably doomed to disappointment. The Fed wants the market to accept that zero rates are ending but feels it has to be cagey about the timing. We are likely to get a repeat of “this year” and nothing more.

The FX market is unsteady and not a little mysterious these days. Some analysts go so far as to say it is “unstable,” a dangerous word. We should not confuse strongly differing viewpoints with instability. Besides, we hear trading volumes are actually quite small, small enough for traders to report a lack of liquidity in the FX market. This is not as rare as you might think and under current conditions, quite logical. Take any currency and you can make a reasonable argument for trending in either direction. Sterling, the yen, and the CAD and AUD are obvious examples.

Not so obvious is the euro. Okay, eurozone growth is higher than US growth (so far), but there the advantage ends. The tiny rise in inflation recently got blown out of proportion—0.3% is better than zero or negative, of course, but it’s hardly the Start of Something Big. The central fact in comparing the two currencies is on-going QE by the ECB and the end of QE in the US. Not only the end of it, but rising rates. QE is only a few months old and Draghi assures us it will go on until end-2016—no paring back, no early end. In the US, the Fed may chicken out in September, but that just pushes the forecast to December—it doesn’t wipe the prospect off the chart entirely.

In a nutshell, there is no reason for the euro to resume an upward trend. There might be a reason for the dollar to be out of favor, but none of the usual suspects are much in evidence these days—budget crisis/default, rising trade deficit, etc. The only big negative we see today, aside from foreign affairs hawks pushing for more US involvement in Middle East wars, is the idiocy of the Republican presidential candidates. Every day we get another really stupid comment from one (or more) of them, or their media flaks (Fox News thinks the pope is a communist, showing no understanding at all of the meaning of the word). But these political developments are very weak in the FX world, almost non-existent.

Maybe the euro is getting a boost from the prospect of a Greek deal, although there is little evidence of that. We have events, but they don’t spell resolution. We continue to hear words like “exasperation” and frustration.” Roger Cohen has a brilliant op-ed in the NYT in which he says it’s not the creditor plan that is absurd, it is trying to save Greece. As the Greeks know, “It can never repay its debts, no matter how many deals with creditors are pulled out of a hat.”

Cohen says the Syriza party is not only led by people with no executive experience, the party itself “includes people who want to re-fight the Greek Civil War (1946-49) in the belief the Communists will triumph this time.” And “Syriza was elected precisely to say foreign-imposed austerity had already done enough damage to Greece.”

“There’s one thing about reality: It tends to come back and kick you in the teeth. Forcing Greece and Germany to coexist in a currency union will always be an exercise in smoke and mirrors. Their economies are mismatched, their temperaments even more so.” Greeks are expecting the worst. “Speculation is rampant — absent a debt deal — of a bank run, capital controls and the issue of i.o.u.’s (that will promptly lose 50 percent of their nominal value, especially if adorned with the face of Finance Minister Yanis Varoufakis). Shortly thereafter follow economic collapse, unrest and new elections.”

Maybe this is not such a bad thing. “Creditors could tell Syriza: You have a century to repay the debt, but now you’re on your own. Fix the country, whether inside the euro or out. Get foreign corporations to put their money in Greece. You want to try the Putin route, with Gazprom stepping in for the I.M.F., go for it! We’re off your back now — so find a way to make Greeks believe in Greece again without the ready excuse that Berlin, or the International Monetary Fund or the European Commission is to blame.
“The European Union has done its healing work here. There will not be another civil war, come what may. The sun will still shine; a gazillion islands will still delight; Greeks will still curse every form of authority; they will still smoke in every restaurant in defiance of the law; they will still have more money than they appear to have; tables in cheap “tavernas” will still offer views that have no price. A Greek meltdown is not the same as a Slovakian meltdown. Life is not just.”

Greece should never have joined the eurozone in the first place. “More of the same might gain a few months. It will resolve nothing, sapping Europe’s energy, and Greece’s potential, for years to come.”

In a word, default and Grexit are the best options. Appreciate Greece for what it is. And it’s not Germany.

It’s possible, just, that the euro’s otherwise unaccountable resilience is down to a new acceptance that whether Greece goes or falls into line doesn’t matter very much. Greece is over as a factor, and it was not much of one in the first place. Economically and financially, this is true. Greece is a mere 2% of eurozone GDP and the sums at risk of default are quite small in the grand scheme of things. So, while the euro rally “should” fade and the dollar rally resume, we have been here before and what “should” occur doesn’t always occur.